While your superannuation is built mostly from compulsory employer contributions, you also have the option to make personal voluntary contributions. This is a great way to put your savings into an investment. Another option is to build your own share portfolio outside of your superannuation.
Both options have advantages and disadvantages, so you will need to consider multiple factors to decide which option is best for you.
According to data from the Australian Securities and Investments Commission (ASIC), about 76% of Australians own a superannuation fund, while only 36% have investments outside of super.
As part of our wealth management philosophy, we highlight the importance of diversified investments. A personal share portfolio and superannuation are essentially both an investment in shares, so which option is best? Should you have both? What do you need to consider?
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Pros and Cons of Investing in Super
- The most noteworthy benefit of investing in superannuation is its tax-effective environment. Contributions to your super fund are usually taxed at the rate of 15%, going up to 30% if the income and concessional contributions exceed $250,000 for a financial year. In any case, the tax rate turns out to be lower than the marginal tax rate.
- Your super is managed with minimal or no effort from you, your super provider manages the investments within your super on your behalf.
- Super is usually invested amongst all investment types (property, bonds, cash, etc), meaning it is generally well-diversified and has less risk than shares alone.
- You will have more money available in your super for when you retire
You can read our full article on why making additional super contributions can benefit you come tax time here.
You can also check out our Knowledge Centre for more info.
- The investments made to the super fund are locked in for a long period. The money cannot be accessed to take care of exigencies or short-term goals, like children’s education or personal needs.
- The amount of which you can invest is limited to $27,500 pretax contributions (salary sacrifice) and $110,000 after-tax contributions.
- Your super is controlled and regulated by the government, and the terms and rates of your super are subject to change.
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Pros and Cons of Investing in Shares
- You control the timeline of shares; they can match your goals and you can buy or sell them freely when it suits you.
- You have more control over what you invest in, perhaps Ethical Investing is of high importance to you or you want to personally choose the companies you buy shares in.
- You can invest as much as you like
- Investing directly in shares is disadvantageous in terms of capital gains tax. The capital gains on a personal share portfolio are taxed at the marginal tax rate between 19% and 45%, while profits on shares invested through the super account are taxed at only 15%.
- It requires high management and in-depth research from either yourself or a professional.
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What to consider
All investment avenues have their pros and cons that must be weighed before making a decision. Furthermore, the choice depends on a variety of external and internal factors.
For instance, if you had $10,000 to invest today, we would factor in your dreams and goals, age, risk tolerance and investment structure, and analyse the current performance of markets before making a recommendation. You will also need to take the following into consideration:
Having a combination of shares inside and outside of your super will help to ultimately provide you with more flexibility and security around your finances. This means you take advantage of the benefits from both investments inside and outside of super and reduce the disadvantages at the same time.
However, it’s important to do your research to ensure you choose the right shares to invest in and that you maintain diversification across your share portfolio by investing in a range of different industries and businesses.
We recommend seeking the advice of a professional to assist with reviewing and structuring your investment selection. A financial planner will be able to review your super and also help structure additional investments to ensure your investment selection takes your entire financial position into consideration.
They can also help with recommending the ideal investment strategy for growing your super and the most beneficial amount to salary sacrifice to obtain the full tax benefits.
Risk Vs Reward
In situations where there is market volatility, there are often opportunities that could be taken advantage of; for instance, if shares are at lower prices due to market falls. However, if you are already invested prior to this time you will also need to consider the exposure of your current investments and wealth protection.
Ultimately investing inside and outside of your super can both be beneficial as part of a long-term investment strategy. An adviser will be able to work with you to decide which is more beneficial for you depending on your own unique situation.
Speak with one of our advisers today to discuss which option is right for you.
What you need to know
This information is provided by Invest Blue Pty Ltd (ABN 91 100 874 744). The information contained in this article is of general nature only and does not take into account the objectives, financial situation or needs of any particular person. Therefore, before making any decision, you should consider the appropriateness of the advice with regards to those matters and seek personal financial, tax and/or legal advice prior to acting on this information. Read our Financial Services Guide for information about our services, including the fees and other benefits that AMP companies and their representatives may receive in relations to products and services provided to you.